Striking balance key for ANZ

ANZ Banking Group
will adopt a balanced funding approach and is unlikely to rush to reach the maximum 8 per cent regulatory cap on covered bonds, according to bank treasurer
Rick Moscati
.

The bank is preparing to tap the Japanese bond market for the second time in two months after it secured ¥85 billion ($1.1 billion) from a five-year samurai bond through institutional investors in January.

Mr Moscati, who is responsible for ANZ’s $18 billion to $20 billion annual funding task, said the bank wanted to issue a range of debt securities this year, including senior unsecured debt and the cheaper covered bonds.

While banks might be tempted to focus on issuing relatively less expensive covered bonds up to the maximum limit allowed before selling more costly debt securities, Mr Moscati said it made sense to offer a range of debt securities. Some investors, such as pension funds, only invest in AAA-rated securities like covered bonds, while other bond investors prefer higher yielding and slightly more risky securities like the bank’s AA- rated unsecured debt.

“Our objective is to remain as ­balanced as we possibly can in terms of accessing the market, both from a domestic and offshore perspective, but also from senior, subordinated and covered bonds," Mr Moscati said.

ANZ is marketing a small four-year retail bond in Japan, which is expected to raise about ¥10 billion and be priced over the next week.

This year, covered bonds have been the preferred source of funding for the major banks. In November, ANZ became the first to issue $US1.25 billion ($1.18 billion) in ­covered bonds, which are secured by bank assets.

Since then Commonwealth Bank and Westpac Banking Corp raised $3.5 billion and $3.1 billion respectively in the local market through the AAA-rated securities.

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National Australia Bank, CBA and ANZ have also raised between €1 billion ($1.24 billion) and €1.5 billion respectively in euro-denominated covered bonds, while Westpac tapped the United States market.

“It perhaps hasn’t been a surprise there has been a focus on covered bonds because they deliver a cheaper cost of funds than senior unsecured debt," Mr Moscati said.

“Obviously we’re doing our best to reduce our funding cost pressures, so issuance of covered bonds is a pragmatic thing to do."

Covered bonds are a cheaper source of finance for banks because they are lower yielding – but safer – for investors.

If the issuer can no longer service the bond payments, investors have a preferential claim on a pool of high-quality assets and their cash flows.

The government, in consultation with the Australian Prudential Regulation Authority, has allowed financial institutions to issue covered bonds up to a limit of 8 per cent of local assets. Hence, the banks will be allowed to raise about $30 billion to $40 billion each from covered bonds.

ANZ has already completed $8 billion in term funding this financial year, almost half of its requirement to September 30.

ANZ estimates about 25 per cent of its $18 billion to $20 billion funding task will be undertaken through covered bonds, with the remainder via senior unsecured bonds.

The big four banks combined will need to raise about $100 billion in term funding this year.

“There’s been a positive start to the year in terms of access to funding," Mr Moscati said.

“January has been a fairly productive month for term debt raising by ANZ and the other three majors, both offshore and domestically.

“Clearly the challenge is in regards to the cost of that debt which has been rising due to market conditions."

Westpac’s local covered bond deal was priced at 1.65 percentage points above the bank bill swap rate, 0.1 of a percentage point cheaper than CBA.

The yields paid by the banks were higher than originally expected and pushed up the cost of issuing more risky unsecured debt.